Should Investors Rethink Starbucks After Leadership Changes and a 12.3% Share Price Drop?

• Wondering if Starbucks is trading at a bargain or if its best days are already priced in? Let’s dive into what the numbers and recent events are saying about its current value.
• Starbucks’ share price has cooled off lately, with a drop of 6.1% over the last week and a year-to-date decline of 12.3%. This has sparked questions about growth potential and shifting investor sentiment.
• Headlines have buzzed around the company's international expansion efforts and changes in leadership. These developments are being closely watched by investors searching for signs of a turnaround. Partnerships and a renewed focus on digital sales are also in the spotlight, which provides new context for recent price swings.
• When we look at valuation, Starbucks scores just 1 out of 6 on our undervaluation checks. However, there is more to fair value than just a simple scorecard, so let’s explore the methods analysts use and uncover an even more telling approach coming up at the end of this article.

Starbucks scores just 1/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.

Approach 1: Starbucks Discounted Cash Flow (DCF) Analysis

The Discounted Cash Flow (DCF) model estimates a company’s fair value by projecting its future cash flows and discounting them back to today’s dollars. For Starbucks, analysts use a two-stage model that starts by forecasting the company’s Free Cash Flow (FCF) over the next several years, then extrapolates further growth based on expected trends in the hospitality sector.

Currently, Starbucks generates around $2.36 billion in free cash flow. Analyst estimates project this figure growing steadily, reaching $3.65 billion by 2028. Looking out a full decade using Simply Wall St’s own extrapolations, free cash flow could surpass $3.15 billion by 2035. All cash flows are referenced in US dollars.

Despite these healthy projections, the DCF model estimates Starbucks’ intrinsic value at $39.50 per share. This is dramatically lower than its current market price, suggesting the stock is trading at a steep premium. Based on these calculations, Starbucks is considered 104.7% overvalued according to this approach.

Result: OVERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Starbucks may be overvalued by 104.7%. Discover 840 undervalued stocks or create your own screener to find better value opportunities.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Starbucks.

Approach 2: Starbucks Price vs Earnings (PE Ratio)

The Price-to-Earnings (PE) ratio is a widely used valuation tool for profitable companies, as it reflects how much investors are willing to pay for each dollar of current earnings. For businesses like Starbucks that generate consistent profits year after year, the PE ratio offers a quick way to gauge whether the stock is trading at a reasonable level compared to its fundamentals.

A company’s “normal” or fair PE ratio is shaped by expectations of future earnings growth and the perceived risks of those earnings. The higher the expected growth and the lower the risk, the more investors may be willing to pay, which drives the PE ratio upward. Conversely, slow growth or higher uncertainty can lead to a lower multiple.

At the moment, Starbucks trades at a PE ratio of 34.9x. That is significantly above the hospitality industry average of 23.3x, and the peer average of 54.6x. However, Simply Wall St introduces the idea of a “Fair Ratio.” This proprietary benchmark, calculated to be 31.9x for Starbucks, considers a blend of factors like the company’s profit margins, growth prospects, risk profile, industry, and size. It offers a more tailored comparison than a simple industry or peer check.

The Fair Ratio outshines other benchmarks because it adapts to the unique attributes of Starbucks, weighing elements like future expectations, industry dynamics, financial strength, and operational risks. This helps identify whether a stock truly stands out as a bargain or is being hyped beyond its fundamentals.

With Starbucks’ current PE ratio just above the Fair Ratio (34.9x versus 31.9x), the difference is relatively modest. This suggests that Starbucks is trading at about the level you would expect for its earnings potential and risk profile.

Result: ABOUT RIGHT

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1414 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Starbucks Narrative

Earlier, we mentioned that there is an even better way to understand valuation, so let’s introduce you to Narratives. A Narrative is your unique perspective or story about a company, such as Starbucks, connecting what you believe about its business and future with hard numbers like revenue growth, margins, and a fair value estimate.

Rather than simply accepting a one-size-fits-all valuation, Narratives make it easy for you to outline your assumptions, visualize a financial forecast, and see how these links translate into a fair value. This is available as a highly accessible tool on Simply Wall St’s Community page, used by millions of investors who want to make decisions with context and conviction.

Narratives empower you to decide when to buy or sell by continuously comparing your Fair Value (based on your story) to Starbucks’ current market price. In addition, they dynamically update whenever fresh business news or financial results emerge, so your view stays relevant.

For example, one investor may build a Narrative expecting rapid international growth, leading to a high fair value around $115 per share, while another might highlight fierce competition and slow recovery, arriving at a much lower fair value near $73.

Do you think there's more to the story for Starbucks? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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